Darling Ingredients Inc. Form 10-K Summary
Business context and reporting period
This filing is an annual report for the 52-week fiscal year ended January 2, 2016, not a 2014 Q4 filing. The company develops and produces sustainable ingredients from animal by-products, used cooking oil and food residuals for feed, food, fuel, pharmaceutical, fertilizer and industrial markets. Operations span more than 200 locations across five continents and are reported in Feed Ingredients, Food Ingredients and Fuel Ingredients.
Fiscal 2014 included 53 weeks, compared with 52 weeks in fiscal 2015. Darling’s VION Ingredients and Rothsay acquisitions materially expanded the company’s international operations and debt profile.
Financial performance and liquidity
| Metric | Fiscal 2015 | Fiscal 2014 |
|---|---|---|
| Net sales | $3.397 billion | $3.956 billion |
| Operating income | $142.6 million | $164.5 million |
| Net income attributable to Darling | $78.5 million | $64.2 million |
| Diluted EPS | $0.48 | $0.39 |
| Adjusted EBITDA | $412.5 million | $434.0 million |
| Net cash from operating activities | $421.3 million | $275.2 million |
| Capital expenditures | $229.8 million | $228.9 million |
| Gross margin | 21.9% | 21.1% |
- Fiscal 2015 net sales decreased 14.1%, primarily because of lower finished-product prices and unfavorable foreign-exchange translation, partly offset by higher raw-material volumes.
- Raw material processed increased 4.8% to 9.69 million metric tons.
- Segment sales were $2.074 billion for Feed Ingredients, $1.095 billion for Food Ingredients and $228.2 million for Fuel Ingredients.
- Reported net income benefited from $73.4 million of equity income from unconsolidated subsidiaries, primarily the Diamond Green Diesel joint venture.
- Cash and cash equivalents were $156.9 million at year-end. Working capital was $488.0 million, with a 2.10-to-1 working-capital ratio.
- Total debt was approximately $1.960 billion, including $500.0 million of 5.375% senior notes, $560.9 million equivalent of 4.75% euro-denominated notes, term loans and revolver borrowings. Revolver availability was $956.7 million after borrowings and letters of credit.
- Management stated that operating cash flow, cash on hand and revolver availability should be sufficient for expected needs over the next 12 months, while noting sensitivity to commodity prices, foreign exchange and operating conditions.
Material changes versus the prior comparable period
- Feed Ingredients operating income fell to $116.5 million from $192.3 million. Lower protein, fat, used-cooking-oil and bakery-product prices outweighed volume growth and lower raw-material costs.
- Food Ingredients operating income rose to $61.2 million from $26.9 million, reflecting improved gelatin demand in China, lower European raw-material costs and normalized edible-fat margins. Fiscal 2014 included a $35.3 million VION inventory step-up charge.
- Fuel Ingredients segment income, including the DGD joint venture, increased to $89.1 million from $85.1 million, primarily because of higher renewable-fuel tax credits. Excluding DGD, operating income declined to $17.2 million from $21.3 million.
- Fiscal 2015 benefited from lower acquisition and integration costs of $8.3 million versus $24.7 million in fiscal 2014 and lower interest expense of $105.5 million versus $135.4 million.
- Fiscal 2015 included a $10.6 million write-off of deferred loan costs related to refinancing the euro term loan B, approximately $3.0 million of fire and casualty losses and a $1.8 million legal settlement.
- Quarterly results were highly concentrated in the fourth quarter: fourth-quarter net income attributable to Darling was $84.4 million, compared with a $9.1 million loss in the third quarter. The fourth quarter included approximately $85.4 million of Darling’s share of blenders tax credits.
- Comprehensive loss attributable to Darling was $80.3 million, primarily because of a $162.4 million after-tax foreign-currency translation loss.
Guidance, outlook, commentary and risks
- The company does not provide forward-looking financial or operating estimates because results depend on volatile commodity prices, energy costs, weather, raw-material availability, foreign exchange, government programs and global demand.
- Management expected approximately $230 million of fiscal 2016 capital expenditures, including continued investment in the Oracle ERP implementation. Total ERP cash-flow impact was expected to be approximately $40 million to $42 million.
- The board authorized a share-repurchase program of up to $100 million in August 2015; approximately $94.1 million remained available at January 2, 2016. The company had not paid common-stock dividends since 1989 and did not expect to pay dividends in 2016.
- The DGD joint venture recorded $156.6 million of 2015 blenders tax credits and distributed $50 million to its partners. The $1-per-gallon blenders tax credit was scheduled to expire December 31, 2016, creating a material risk to future results.
- Debt amendments increased the maximum total leverage covenant to 5.5-to-1 and modified pricing and other covenant provisions. The company stated that it was in compliance with its financial covenants at year-end.
- Primary risks include commodity-price and margin volatility, competition for animal by-products and used cooking oil, dependence on major suppliers, foreign-exchange movements, variable-rate debt, energy costs, food-safety or animal-disease events, environmental and permitting requirements, pension and multiemployer-plan obligations, litigation, cybersecurity and ERP implementation risk.
- Loss-contingency reserves for insurance, environmental, litigation and tax matters were approximately $54.6 million, with $12.2 million of related insurance-recovery receivables. The Lower Passaic River matter and Fresno facility permit litigation remained unresolved; management did not expect either to have a material effect, but ultimate outcomes were uncertain.
- Goodwill was approximately $1.233 billion. Annual impairment testing identified no impairment, but seven of nine reporting units had fair values less than 30% above carrying value and four had less than 10% cushion, creating sensitivity to lower prices, margins or raw-material volumes.
Most important facts for an investor to verify
- Reconcile reported earnings with the substantial fourth-quarter renewable-fuel tax credits and assess the sustainability of earnings excluding those credits.
- Review debt maturities, interest-rate exposure and compliance with the 5.5-to-1 maximum total leverage covenant.
- Assess whether lower protein, fat and used-cooking-oil prices are cyclical or represent a sustained margin deterioration.
- Evaluate DGD joint-venture performance, distributions, refinancing needs and exposure to renewable-fuel mandates and tax-credit extensions.
- Review goodwill sensitivity, particularly for Canada Fuel, Canada Feed, Rousselot and ERS Food reporting units.
- Verify the status and potential exposure of environmental, permit, product-liability, pension and multiemployer-plan contingencies.
- Confirm fiscal-period comparability because fiscal 2014 had an extra week and included substantial acquisition-related charges and VION inventory step-up costs.